Friday, November 12, 2010

Paul Tudor Jones Questions Fed’s Bond Buying

One of the kings of global macro.*
From DealBook:

Paul Tudor Jones, the successful currency trader, says that fixing the “gross misalignment” of China’s currency against the dollar would do more to lower unemployment in the United States than the recent move by the Federal Reserve to buy large quantities of Treasury bonds.

Mr. Tudor Jones is the second prominent figure in the hedge fund world to question the effectiveness of the Fed’s “quantitative easing” effort.

On Thursday, DealBook reported that David Einhorn, the president of Greenlight Capital, called the Fed’s move “perverse” and said there was a high degree of risk that it would create another asset bubble.
“The developed world, and the United States in particular, is suffering an economic malaise the likes of which we’ve seen only rarely in the last 100 years,” Mr. Tudor Jones said in a 14-page letter to investors that was dated Oct 21. “Policy makers are searching for solutions but they are too focused on the painful symptoms of unemployment to see the misshapen structure causing it.”

In his view, the real culprit is the undervaluation of the Chinese currency, the renminbi, against the dollar which he believes has led to the loss of millions of jobs in the United States. That in turn, he says, has contributed “to the most unsustainable economic imbalance in the world today — China’s persistent bilateral trade surplus with the United States.”
Mr. Tudor Jones says in the letter that any serious attempt to address the structural imbalance in trade between China and the United States “is met with a chorus of boos from financial industry pundits who rail against ‘protectionism,’ lobbing into the fray “the most dangerous of words: ‘Trade War.’

“But what they fail to see, or neglect to acknowledge, is that in modern times there has never been free trade with China,” he writes. “The U.S. has already been in a trade war for nearly two decades; and it is the only time in this nation’s history it surrendered without ever firing a shot. The United States lost six million jobs, indebted itself to China by $1.4 trillion, and received in return a host of consumer goods, many of which now reside in landfills across the country.”

In the letter, Mr. Tudor Jones said he had asked the modeling and forecasting firm Macroeconomic Advisors to test the effect of two different policy fixes for America’s unemployment problem. The conclusion? Large-scale asset purchases like the one the Fed recently announced will have a “minimal impact on unemployment that completely fades to zero by 2015,” he said....MORE